Terminal Error

How county-provided data doomed the stadium tax economic impact study

Sixteen years ago, as the vote for the now infamous stadium sales tax issue loomed for the March primary election, proponents of the half-cent sales tax hike to fund construction of new stadiums for the Reds and Bengals got a boost from an economic impact study that foretold a prosperous future.

The study, conducted by the University of Cincinnati’s Center for Economic Education, predicted more than $1 billion flowing into local coffers during the construction phase of the stadium, a $300 million annual economic boon to the area and more than 6,000 new jobs — nearly half funded by non-Hamilton County residents.

With the study in hand, proponents went on to take a slight majority and build it into a 61-percent mandate from voters that March to build new homes for the teams.

Knowing now what lay ahead, with the cash-strapped county mired in debt and cutting services to residents, not to mention a forecasted $14.2 million deficit in the stadium fund this year, voters probably would balk at supporting the initiative today.

And those deficits are estimated to continue mounting, totaling $25 million in a few years and jumping to about $700 million by 2032.

Since 2008, Hamilton County officials have cut spending by more than $65 million and eliminated 1,500 jobs. As they scramble for long-term solutions, commissioners are pondering the sale of the county-owned Drake Center hospital in Hartwell. (The reductions are due to various factors related to the economic downturn, and no county employee has been laid off as a result of the stadium fund deficits, says John Bruggen, the county's budget director.)

Local attorney Tim Mara, one of the loudest opponents of the stadium issue at the time, looks back with a shaking head.

“It was wishful thinking, purely,” says Mara, who headed the group Citizens for Choice in Taxation, which forced the ballot issue by collecting more than 90,000 signatures earlier that year. “The study said ‘If you build these stadiums, all sorts of economic development will follow.’ But if that was the case, we asked everyone, why didn’t that happen when Riverfront Stadium was built? Why would these stadiums be any different? It wasn’t.”

“It was more like a ‘hype report’ rather than an objective study. The report clearly had the result of shifting public sentiment for the stadiums. It was part and parcel of a well-orchestrated, well-thought-out campaign.”

Both the study and the lease deal hammered out between Hamilton County and the teams after the passage of the stadium issue have drawn criticism from national economic experts.

Roger Noll, a stadium finance expert from Stanford University, famously told The Wall Street Journal last July that Cincinnati set “new records for optimistic forecasting” with the deal.

Still, the center defends the report, with director George Vredeveld calling it one of the most careful his people had ever done and “a good piece of work,” despite its flaws.

“This isn’t a science alone,” he says. “There’s a lot of art to it, too.”

A ‘Hot Button’ Issue

In September 1995, with the proposed sales tax already hotly debated, the county approached Vredeveld and UC to look at the long-range economic benefits of building the stadiums that were estimated to cost the county upwards of $540 million.

The center had been doing scholarly work examining economic trends and forecasts since it opened in the late 1970s, and had begun doing contract research for outside clients by the early ’90s. Vredeveld agreed to do the study, getting a $23,000 commission for the center, while the county would provide much of the baseline information, including projected tax revenue estimates.

Knowing it was already a “hot button issue,” Vredeveld quickly put together a three-member team to conduct the research.

“As it turned out, we ended up having one person who went into the study strongly for building the stadiums, one ... she couldn’t decide if it was a good idea and one who was very much against it,” says Vredeveld, “and they were very good at keeping each other in check. With an operation like this, you want to be certain you don’t go in with the idea of what a report is going to say. We’re known for objectivity.”

Lee Cerveny, now an award-winning researcher with the U.S.D.A. Forest Service’s Pacific Northwest Research Station in Seattle, was one of the team members, along with Marie Haney (later married and now working for P&G as Marie Matacia) and a graduate economics student.

Cerveny, who would leave the center by the end of the study, remembers the work being “rushed” but tortured.

“We struggled through a lot of issues, wanted to be as objective as we could and wanted to get things right,” she remembers. “We worried over every detail.”

One of the issues that caused debate, Vredeveld says, and “missed the mark” was an expectation of a 3-percent increase in tax revenues annually, ad infinitum, to fuel the stadium fund.

That projection, he says, was supplied by county officials. Over time, it fell far short of reality.

“At the time, it seemed reasonable. Maybe a little conservative, even, but not unrealistic,” he adds. “We examined it to see if it would pass the sniff test, and finally decided that it did.”

The county also provided game attendance figures, along with stats on spending by gameday fans.

The center examined the stats and ended up using many of them, Vredeveld says.

As the three-member team sweated over the complicated data throughout the holidays, it became clear that the results were eagerly anticipated.

“We kept getting more and more calls from the media asking when the study would be complete, and when we would release them, so there was no doubt this was a hot issue,” Vredeveld says.

By late December, the study was completed. It was released soon after New Year’s.

‘A good piece of work’

On Jan. 3, 1996, the center released the study. Almost immediately, stadium supporters and opponents swooped on it, using its findings to bolster their arguments.

Stadium supporters touted the economic benefits forecasted and predicted a windfall for county programs and services by keeping the teams in town. Opponents, like Mara, pointed out that an associated property tax rebate would mean low-income families and those who don’t own homes would shoulder a much larger burden of the tax, and the study supported that view.

As the March election edged closer, the pro-stadium crowd — buoyed by the study — won the public over.

“Both groups used it to support their arguments, which I think says that we remained objective,” Vredeveld says. “Looking back, the study — at least from a methodology point of view — was a good piece of work. As the vote came closer, the people in favor of the tax used it more extensively, though.”

The reason, Mara counters, is that the report was clearly flawed.

“It didn’t take much analysis to reach that conclusion,” he says. “There were a number of points that just didn’t sound right, that that weren’t right.”

A Newhouse poll of voters reported that 37 percent of those who supported the tax did so even though they didn’t like it, and almost half voted out of fear of losing the teams. Also, a large number of “yes” voters cited the economic benefits spelled out in the UC study as a reason for their uncertain, yet hopeful, support.

With the benefit of hindsight, it’s clear they were wrong.

Four years later, by the time Paul Brown Stadium was completed, its price tag had grown considerably over the $280 million projection. According to the county, the final cost was $454 million including a move to a new location and infrastructure costs, already creating a massive dent in the Stadium Fund.

By 2008, paying for stadium costs, along with the debt accrued in the deal, cost taxpayers $29.9 million — which is equal to almost 11 percent of the Hamilton County's general fund budget. A year later, those numbers rose to $43.6 million (which equates to almost 17 percent of the county's general fund budget).

Although Great American Ball Park was completed in 2003, on budget, and hasn’t increased its pull on the debt burden, the county finds itself struggling to keep up with financial promises made to voters in 1996. Exacerbating the problem, says County Auditor Dusty Rhodes, county leaders began spending the stadium funds on other projects from redesigning Fort Washington Way to constructing the underground parking garage near the stadiums for the proposed Banks district.

According to Rhodes, initially there was to be a stadium authority that oversaw spending that was supposed to include county commissioners, himself, Cincinnati’s mayor and others. That soon morphed into a much smaller committee.

“(County Commissioner Bob) Bedinghaus and (County Administrator David) Krings then became ‘lord-high gurus’ and took all those decisions upon themselves. That was stupid, not having a wide range of input. Then, everyone started spending like crazy on all these pet projects,” Rhodes says.

Bedinghaus, who now works for the Bengals, and Krings, now retired, didn’t respond to CityBeat’s interview requests.

Another commissioner, Guy Guckenberger, who left office soon after the stadium deal, declined comment. As a part-time judge, he doesn’t feel it’s appropriate to comment on public issues. John Dowlin, the third county commissioner at the time, has since passed away.

As spending increased, county coffers began to shrink.

In large part, that’s because tax revenues haven’t lived up to that rosy 3-percent annual increase foretold by the UC study and stadium proponents. Shortly after the vote, revenues began to fall off, Rhodes says. Over the past decade, they’re hovered at around 1 percent, which means a difference of millions of dollars for the stadium fund.

Rhodes bristles at that fact. He and his staff weren’t involved in the study, Rhodes says, and would’ve cautioned about such unbridled optimism. Instead, he tried to warn county commissioners.

“I warned them, no tree ever grows to the top of the sky. Markets change, revenues fall. Bedinghaus called me ‘Chicken Little’ when I said that, but ... I was right,” he adds. “In some of the early years, tax revenue was closer to zero, and those are the years in a bond issue when you’re supposed to make hay to pay off a bond. They didn’t get it, and they’ve been in a hole ever since.”

Vredeveld says all revenue forecasts were provided by Krings’ office. While the center did examine those numbers and deemed them accurate, it is — in hindsight — a major failing of the study.

“Every once in a while, we get stung when the data provided to us turns out to not be as good as we thought. In this case, some of the assumptions the county made, and gave to us, didn’t turn out to be as good as we thought,” Vredeveld said.

“We didn’t see it coming. The county certainly didn’t foresee it, either.”

Still unknown — because it hasn’t been studied in all the years since — is exactly how much of the sales tax burden county residents are shouldering. The study, using formulae from other sources, predicted residents would only pay 55 percent of the burden; 45 percent would be paid by out-of-county visitors.

Bad Information, Bad Results

Depending on these types of studies are perilous, say experts. The Cincinnati stadium report is a prime example, says Dr. Dennis Coates, a professor of economics with the University of Maryland and president of the North American Association of Sports Economists.

“The UC study wasn’t a badly done report by industry standards,” Coates says. “There’s nothing egregious in there, but like many of these studies, they tend to overstate the benefits by not looking at what happens if you don’t use that money to build stadiums. They don’t examine what happens if you take that money and spend it elsewhere.”

In 2004, Coates and Brad Humphreys, another economics expert, penned a report for the Cato Institute in Washington, D.C., that examined the relationship of sports teams to their cities, as well as impact reports done to support keeping teams that were threatening a move.

Their finding: Teams have little effect on a local economy, overall, when balanced against “opportunity costs” — or the cost of an alternative that must be forgone in order to pursue a certain action, and the benefits that could’ve been received by spending the money elsewhere.

In his work, Humphreys has reviewed numerous studies like UC’s.

“It was very typical,” he says. “The problem with most of them is that they build their model on faulty numbers that are provided by the people who hire them to do the report. In fact, most studies include a disclaimer that they don’t vouch for the third-party information given to them.”

An appendix of the UC report says it included information from a dozen sources, including the city, county and the Bengals. As Vredeveld admits, some of that information turned out to be “disappointing.”

“If you assume those numbers are fact, then build a model around it ... well, when you start with bad information, you end up with bad results,” Coates says.

Bruce Johnson, an economics expert from Centre College in Kentucky, has kept an eye on Cincinnati’s stadium situation for years, partly from professional interest and also because he’s a lifelong Reds fan. In his classes, Johnson is tempted to present the stadium deal as a case study, he says.

“I have to wonder why Cincinnati’s not more prominently featured nationally when sports teams come calling with their hands out, asking for money,” Johnson says. “Cincinnati’s a prime example of why it doesn’t work.”

A large part of the problem in forecasting economic impact comes when vested interest groups commission the reports, rather than a purely academic endeavor, and the lack of review after, he adds.

“These kinds of reports are always paid for by proponents,” Johnson says. “That’s why it’s important when one of these studies come out, I always look who paid for it and what they want it to say. There are accepted procedures researchers use, but you can make the numbers say anything you want.”

“If someone pays you to do a report, even if the intent isn’t consciously there, you’re going to have in the back of your mind what they want to hear. And it wouldn’t take very many contrary reports before you’re not going to get any more contracts,” he adds.

Reviews after the fact are rare, as well, because “they’re going to have to say ‘we were wrong.’ They’re not going to call attention to the fact that the taxpayers got snookered,” Johnson adds. “If they come out and say, once again, ‘wrong again’ ... why would anyone hire them again?”

The Aftermath

Vredeveld is retiring as the center’s director in March, but work there continues. The center has done almost 150 studies since its 1996 report, and 250 since its inception, ranging from impact reports for the National Underground Railroad Freedom Center and the Cincinnati-Northern Kentucky Airport.

As one of few university-affiliated centers in the nation to offer studies, it remains a respected institution.

Rhodes says the center is a “convenient scapegoat” for the study’s results and ensuing financial turmoil for the county, given everything that’s happened — and not happened — in the interim.

Still, he can’t help musing that being an economic forecaster is the “best job in the world.”

“Nobody ever holds you accountable,” Rhodes says. “One of the things they said was that building the stadiums was going to jumpstart riverfront development, but all it’s done is jumpstart the demand for more taxpayer money.”